Price Dispersion and Frictions in the Physical Capital Market ∗

We study the market valuation of physical capital and the frictions associated with its trading. Using a unique dataset on a panel of nonresidential structures listed for trade, we document a large degree of price differences that cannot be explained by the rich set of characteristics included in the listings. We also show that listings with high price relative to their listed characteristics have systematically higher expected returns, but longer expected durations. We analyze the empirical support for alternative theories explaining these facts and find that the data patterns are consistent with theories of frictional trading with asymmetric information in capital quality. We use this environment, together with our empirical evidence, to quantify the implications of these frictions for investment inefficiencies and misallocation.